Friday, 13 May 2016

Conflict - Do I need to report to my lender client or not?

The
scope for conflict in a conveyancing transaction when acting for a buyer and
the buyer’s lender is extensive and is often overlooked by busy practitioners.

It
is clear from the Court of Appeal decision in Mortgage Express Limited v
Bowerman & Partners [1995] The Times, 1 August that in circumstances where
a conveyancer acts for both the borrower and lender in the course of a
residential conveyancing transaction, although the conveyancer’s implied duty
extends beyond referring matters of title to the lender, the duty only extends
to disclosing information that might have a material bearing on the lender's
potential security or its decision to lend

In
other words, matters which could lead to the lender’s surveyor/valuer
reconsidering the adequacy or otherwise of the value of the security to be
taken from the client to secure the mortgage, or the ability of the lender to
sell the property quickly should the mortgage be foreclosed, or the clients
affordability to repay the loan.

Examples
include:

The
potential contamination of the land

Serious
flood risk

Boundary
issues

Client’s
disclosure of redundancy or dismissal

Close
proximity to HS2 route

Sub-sales
or where the current owner has owned the property for less than 6 months.

So
what happens should information come to a conveyancer’s knowledge which gives
rise to a conflict of the interests between those of the client and those of
the lender?

In
these circumstances where the information is of a confidential nature, the
conveyancer must either obtain the client’s consent to disclose the
information, or decline to act for both parties.

The
conveyancers ( defendant ) in Mortgage Express Limited v Bowerman &
Partners [1995] The Times, 1 August, were instructed to act for Mortgage
Express Ltd and the prospective purchaser of a flat at Queensway, London, for
the sum of £220,000. Prior to exchange of contracts, the conveyancers
discovered that the property was the subject of a sub-sale to the vendor which
was to be completed contemporaneously with the purchase for £150,000. The
lender had agreed to make a loan of £180,150 based on a valuation of £199,000.The
conveyancers reported the sub-sale to the client who confirmed that he was
prepared to accept the price as he wished to purchase this particular property.

The
Conveyancers were satisfied with this response but did not inform the lender of
the existence of the sub-sale. The lender satisfied the court that if it had
been informed of the sub-sale, it would not have lent the purchase money to the
purchaser, and alleged breach of duty and/or negligence on the part of the
conveyancers.

At
first instance, Mrs Justice Arden held that a conveyancer’s duty to his
respective clients is to protect their respective interests when carrying out
their instructions, and found that the conveyancer owed a duty of care to
report to the lender the information he had about the sale price.

The
Court went so far as to find that the solicitor is bound to take some action in
relation to 'any information which puts him on enquiry as to the accuracy of
the valuation' and that the failure to disclose any such information amounted
to negligence.

On
appeal,he
Court of Appeal held that the information concerning the price and the
existence of the sub-sale was not confidential to the client and was of equal
importance to both clients, albeit for different reasons.

On
the facts, the court held that the information might have led a reasonably
competent solicitor to form the view that the information might have caused the
lender to doubt the accuracy of its valuation and, as a consequence, the
information ought to have been passed on to the lender. During the course of
its judgment, the Court of Appeal re-affirmed the duties of a solicitor in
circumstances where the information is of a confidential nature to the borrower.

The
Court of Appeal added that it was not the solicitor's duty to comment on value,
but to disclose information which might cause the lender to doubt the accuracy
of the valuation.

Interestingly
the suggestion was that if the difference between the sub sale price and
valuation was not significant then there would not have been a duty on the
conveyancer to report. In my view and with reference to the requirements
of the CML Handbook I consider it would be dangerous not to report even if
there difference was only small.

Practical
Implications

It
is clear that a practitioner will need to make a judgment call to determine
what information it receives could be regarded as confidential to the client
and which is not. If it is confidential ( e.g. loss of job) then the
client’s consent will be required before reporting the information to the
lender. If as in the above case it is not then there is no need to seek consent,
though in practice the client should be alerted and warned that the reporting
could lead to the withdrawal of the mortgage offer.

The
situation can be helped through the inclusion of a provision in the
conveyancer’s terms and conditions which gives the conveyancer express
authority ( without further recourse to the client ) to disclose matters to a
lender when a possible conflict arises. Even with the existence of such a
clause it would still be advisable to make the client aware.

If in a conflict situation there is a clear instruction by
the client not to disclose then the practitioner should decline to act for both
clients straight away.

MJP
Conveyancingare
solicitors who provide legal advice and services to clients based in England
and Wales and who can be contacted on 01603877067 or via email atdavidp@mjpconveyancing.com